What If I Can’t Pay Back a Payday Loan?

I had a payday loan I took out in 2011. I became unable to work and had to have surgery in 2012. I began attempting to repair my credit after my divorce in 2015. In 2016 the collection agency reported the debt to the credit bureaus. Is this legal that they waited this long to report it to the credit bureaus, and if so, does it fall off seven years from the time I took out the loan or seven years from when they reported the account as opened on the credit report?

- BKH

Dear BKH,

If you take out a payday loan and are unable to pay it, your credit may suffer. The loan company will likely use any method available to them to collect on the debt. In some cases, that can even mean automatic withdrawals from your bank account or wage garnishment through your employer.

How Payday Loans Can Impact Your Credit

Payday loans are short-term loans where an individual can borrow funds needed to cover unexpected expenses until the date of their next paycheck. Payday loans often carry high interest rates, and can quickly turn into a case of mounting debt if not paid back within the first pay period.

If you continue to be delinquent on the account, the loan company may sell the debt to a collection agency, as in your case. Once a collection agency purchases the debt, they have the right to report the account to the credit reporting agencies, as long as it is within seven years of the original delinquency date on the account.

Once the seven year period is up, the account will be removed from your credit report automatically. Neither the date when the account was opened nor the date the account was first reported to the credit reporting agency affect how long it will remain in your report. Depending on the laws in your state, the creditor may continue to try to collect the debt even after that time period, but the account will no longer appear on your credit report.

In some cases, either the payday loan company or the collection agency that purchases the debt may decide to file a lawsuit against you to recover the money owed. If a judgment is filed against you, it will become a matter of public record, and may then appear in the public record section of your credit report. Judgments remain on your credit report for seven years from the date they are filed, and have a substantially negative impact on credit scores. Therefore, if the debt is valid, it's in your best interest to pay it before getting to that point.

What Happens if I Pay the Collection Account on My Report?

If you decide to pay off the collection account, the collection agency will update the account on your credit report to show it has been paid and there is no longer money owed. In some cases, you may be offered a settlement. While settling the account is better than not paying it all, be aware that a status of "settled" is considered negative because you did not pay the balance in full. Paying or settling the account does not change when the account will be removed, but a paid collection account is often viewed more favorably than an unpaid one.

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